Pragmatic decision – The Hindu BusinessLine

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The EPFO’s decision to slash interest payable to subscribers to 8.1% for FY22 is a pragmatic one

The recommendation by the Employees’ Provident Fund Organisation’s (EPFO) Central Board of Trustees to slash the fund’s interest rate to 8.1 per cent for FY22, a four-decade low, may draw flak from subscribers, but the decision is sensible. It is good to know that the EPFO is funding this payout entirely from its annual surplus and will still be left with about Rs. 450 crore. The reduced return of 8.1 per cent is still vastly superior to prevailing interest rates of 5-6 per cent on long-term bank deposits and 7.1 per cent on the Public Provident Fund; India’s 10-year government bond yield averaged 6.3 per cent this fiscal. In the past, the EPFO has been known to dip into accumulated reserves and unclaimed balances to bankroll high interest payouts. But such a practice is clearly untenable. Persistent mis-alignment between the EPF’s declared returns and its portfolio yield can only lead to a Ponzi-like situation where inflows from its new subscribers are eventually used to bankroll retirees’ claims.

Having said this, market interest rates in India have steadily headed south in recent years and it has now become necessary for EPFO, as a retirement savings vehicle, to strive for an inflation-beating return. A beginning has been made by channelling 15 per cent of EPF’s incremental flows into the stock markets in recent years, even as the bulk of its legacy corpus is invested in government bonds. But changes in its investment and accounting functions are needed to make this work. One, though the EPFO has been investing in equities, it is yet to hit upon a reliable mechanism to either optimise its equity returns or share them with subscribers. The fund’s portfolio is not marked-to-market and it has been booking annual profits on its equity investments to pay out the gains to subscribers. But stock markets do not deliver linear returns, and this strategy could force the fund to sell stocks at beaten-down prices in bear markets and consequently interrupt compounding of returns for subscribers. More modern accrual accounting methods, with NAV-based accounting for subscribers may be the way forward. Two, before exploring new-age vehicles such as Invits, REITs and venture funds, the EPFO must be encouraged to deploy more money in India’s corporate bond market which offers a breadth of opportunities today. Three, the EPF today carries a large number of inactive and dormant accounts, with the result that it is obliged to credit interest to over 22 crore subscribers, while receiving annual contributions only from 6.4 crore members. The Centre and EPFO should try to identify the owners of dormant accounts and refund their moneys so that more of the surplus can be freed up for distribution to active members.

Overall, by seeding its subscriber accounts with Aadhaar and PAN, assigning unique account numbers and ushering in account portability, the EPFO has vastly improved the user experience in recent years. It is now time for it to focus on streamlining its back-end investment management and accounting functions to deliver better returns as well.

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